Alarms of economy

Ilham Aliyev chaired today's meeting of the Cabinet of Ministers dedicated to the results of economic development of the first nine months of 2015. Information on the progress of the meeting and data on the state of the economy have not yet been made public.

The news agency Turan in the traditional mode monitors the situation and that's what it observed in the economic life of the country at the beginning of H2, 2015:

One must agree with those who said that many trends of the world economy are tied up to two big powers – US and China – this way or the other. The financial crisis in 2008 was provoked by the mortgage crisis in the US. The potential of globalization in the 2000s was happening against the background of unprecedented growth of the Chinese economy. Today decline of oil prices started from a wide-scale pioneer development of the shale gas in the US on the one hand and slowing down of growth of the Chinese economy, which is the biggest consumer of hydrocarbons, on the other hand. It is useless to try to find a conspiracy here, as Russia tried to do in 2014. The shale oil has accelerated struggle for the markets and a result of that oil prices went down. It seems like the US dollar rate has never affected economies as it does today. In September everybody was waiting for the statement about increase in interest rates from the US as a very important event. This is not only because of the feedback between the US dollar value and the oil price. Low interest rates in the US did contribute to the economic growth, because the services sector forms three fourth of the US economy. But almost zero interest rate is not normal for the world economy: the country issuing the main currency in the world unanimously sets rules of the game and pushed the economies to the currency wars. On the other side we see the Chinese economy, which changes the development trends towards growth of local demand. Everybody is also waiting for serious changes here. It is obvious that pace of growth of the Chinese economy will be slow. But the announced development trend already pushed the Chinese economy to the new solutions. China’s readiness to allot credit for construction of the trans-Siberian pipeline in Russia, which will connect China with Europe, is caused by the fact that China is going to remove its manufactures outside of the country. The current problems of our economy are first of all connected with two processes – global changes and global economic decline as well as slow structural reforms in Azerbaijan. When one is dependent on the events, which one cannot control, the structural reforms is the only worthy answer to the new challenges, because they provide the economy with the required flexibility.

Image of Azerbaijan as an island of economic prosperity, which was created during the crisis in 1998 or 2008, is slowly melting. For the first time after 20-year-long oil epic Azerbaijani President said that one should not further count on oil anymore  and offered to seek other ways of economic development. At the session in the Cabinet of Ministers he urged to pay a special attention to the advantages of the innovative development. But the innovative development required full revision of education, science and management and one needs years for that. It took seven years to Russia to create Skolkovo and Rosnanotechnologies and the successes are rather limited. One can surely visualize an ideal picture that the re-industrialization of our country intersects with the innovative trend. But many economists warned the authorities that the Silicon Valley, to which Skolkovo is oriented, was a product of private initiative and venture capital. In other words, crossing of the innovative development and re-industrialization could demand a final revision of the system of economic relationships in our country. Without that the economic authorities are doomed to the point measures.

The situation in the economy is not as bad, as it could seem. The country still has financial resources. But nobody knows how long the current turbulence is going to last. In September  growth of real GDP started going down to 4.2%, which was expected long ago (see Attachment). By the end of the year real GDP growth is expected to be 1.8%. Some analysts calculated that though export of oil and oil products constituted 65% of export in Kazakhstan and 85% in Azerbaijan, negative influence of oil prices lead to GDP reduction by no more than 0.1% in Azerbaijan and Kazakhstan expects reduction of GDP by 2.7%. The non-oil sector of our economy has increased by 7,3% but, what it seems more important, the growth of non-oil sector  in industry was  11.3%.

In September everybody was talking about the budget and that the non-oil sector must become the main source of the budget incomes. President added that it should be balanced, considering “real situation.” The country is not going to give up the investment projects, but only the projects with the return should be included into the budget. The government was announced war against squandering of the budget and the talks about privatization of some state agencies have started.

The government tries to optimize the state expenses. But it is very hard to do, because the entire state capitalism of the country is oriented to big money. Now the situation is changing. The time when the Ministries fought for the state funds is over: we simply no not have such financial resources. The changes are inevitable. For instance, some agencies, such as Taxes Ministry, could not increase incomes for a long time, because transfers from SOFAZ were going up in parallel and they ensured budget growth. Today the Taxes Ministry is forced to re-structure its management, as a result of which the departments collecting debt from the non-payers will have more powers. The Ministries themselves must learn to work efficiently and make money.

The government is seriously worried about inflation growth. But the administrative price restraint, what the government was doing after February, has limited resources. Even the loyal to the authorities economic groups cannot constantly follow the authorities’ appeals, though they have significant preferences from the authorities. President of Azersunholding, which controls a significant part of the food product market in the country, said that after devaluation the holding had to increase prices for its products by 20-30, because majority of the products of the holding are imported. He said the holding has increased prices by only 5-10% and it works with losses now. But this is the price for almost a monopoly position of the holding at the market, the soft credits it receives and participation in the non-profile projects. One can ask why a significant majority of raw material for the enterprises of the holding is imported? Rather successful Accord company turned out to owe the International Bank of Azerbaijan (IBA) 1.2 billion AZN. The state air company AZAL was forced to open low cost flights, but it is unclear how long the situation could be controlled. The government has fixed prices for some medicines, but soon they disappeared from the drug stores. There should be understanding that competition is the main mechanism of struggle against inflation.

President has urged to deepen the management reforms and mentioned that the government “needs to seriously fight against corruption and bribery.” But the only worthy answer to the “market autocracy” (as one Russian analyst called the post-Soviet economies) is a real protection of property right and proper judicial system. We lack structure in the decision making. This means that one needs to take several synchronized steps at a time, instead of separate steps. In particular, the way out for the Russian economy was three synchronized steps: diversification, investments and reduction of costs. But former Russian Finance Minister Kudrin was, probably, right by saying that Russian has two problems: institutions and corruption.